The OECD inclusive framework has issued a policy note setting out two main areas for renewed international discussions on agreeing a long-term solution for taxation of the digital economy by 2020. A public consultation in Paris during March will be followed by a detailed consultation document in due course.
The policy note, Addressing the tax challenges of the digitalisation of the economy, identifies ‘two pillars which could form the basis for consensus’. One pillar addresses the broader challenges of the digitalised economy and focuses on the allocation of taxing rights, while a second pillar addresses remaining BEPS issues. This two-pillar approach, ‘would recognise that the digitalisation of the economy is pervasive, raises broader issues, and is most evident in, but not limited to, highly digitalised businesses’.
The first pillar will focus on modifying existing transfer pricing rules, adapting the ‘nexus’ principle to take account of marketing intangibles, user contribution and significant economic presence. The inclusive framework will consider, on a without-prejudice basis, several proposals to allocate more taxing rights to market or user jurisdictions in situations where value is created by a business activity through participation in the user or market jurisdiction not currently recognised in the framework for allocating profits.
Some of these proposals would require reconsidering the current transfer pricing rules as they relate to non-routine returns, and other proposals would entail modifications potentially going beyond non-routine returns. All proposals would lead to solutions going beyond the arm’s length principle and also beyond the current limitations on taxing rights determined by reference to a physical presence.
Discussions on the nexus rules might involve changes to the permanent establishment threshold, including the concept of ‘significant economic presence’ discussed in the BEPS Action 1 report, or the concept of ‘significant digital presence’, as well as special treaty rules.
The inclusive framework recognises that these proposals may affect not only a small group of highly-digitalised businesses, but also a much wider group of enterprises with cross-border business operations, such as those with marketing intangible profits, but only limited risk-distribution structures in market jurisdictions. This would require further technical work on design considerations.
The second pillar will explore rules, also on a without-prejudice basis, designed to give jurisdictions a remedy in cases where income is subject to no, or only very low, taxation. The proposal would seek to address the continued risk of profit shifting through the development of two inter-related rules:
an income-inclusion rule; and
a tax on base-eroding payments.
The proposal recognises that countries or jurisdictions remain free to set their own tax rates, or not to have a corporate income tax system at all. It nevertheless considers that in the absence of multilateral action there is a risk of uncoordinated, unilateral action, both to attract more tax base and to protect the existing tax base, with adverse consequences for all.
The inclusive framework intends to agree a detailed programme of work at its May meeting, with a view to reporting progress to the G20 Finance Ministers in June 2019 and delivering the solution in 2020.
‘The international community has taken a significant step forward toward resolving the tax challenges arising from digitalisation’, said OECD tax policy director, Pascal Saint-Amans. ‘Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important.’
The inclusive framework will hold a public consultation in Paris on 13 and 14 March, to be followed up with a detailed consultation document in due course.
The OECD inclusive framework has issued a policy note setting out two main areas for renewed international discussions on agreeing a long-term solution for taxation of the digital economy by 2020. A public consultation in Paris during March will be followed by a detailed consultation document in due course.
The policy note, Addressing the tax challenges of the digitalisation of the economy, identifies ‘two pillars which could form the basis for consensus’. One pillar addresses the broader challenges of the digitalised economy and focuses on the allocation of taxing rights, while a second pillar addresses remaining BEPS issues. This two-pillar approach, ‘would recognise that the digitalisation of the economy is pervasive, raises broader issues, and is most evident in, but not limited to, highly digitalised businesses’.
The first pillar will focus on modifying existing transfer pricing rules, adapting the ‘nexus’ principle to take account of marketing intangibles, user contribution and significant economic presence. The inclusive framework will consider, on a without-prejudice basis, several proposals to allocate more taxing rights to market or user jurisdictions in situations where value is created by a business activity through participation in the user or market jurisdiction not currently recognised in the framework for allocating profits.
Some of these proposals would require reconsidering the current transfer pricing rules as they relate to non-routine returns, and other proposals would entail modifications potentially going beyond non-routine returns. All proposals would lead to solutions going beyond the arm’s length principle and also beyond the current limitations on taxing rights determined by reference to a physical presence.
Discussions on the nexus rules might involve changes to the permanent establishment threshold, including the concept of ‘significant economic presence’ discussed in the BEPS Action 1 report, or the concept of ‘significant digital presence’, as well as special treaty rules.
The inclusive framework recognises that these proposals may affect not only a small group of highly-digitalised businesses, but also a much wider group of enterprises with cross-border business operations, such as those with marketing intangible profits, but only limited risk-distribution structures in market jurisdictions. This would require further technical work on design considerations.
The second pillar will explore rules, also on a without-prejudice basis, designed to give jurisdictions a remedy in cases where income is subject to no, or only very low, taxation. The proposal would seek to address the continued risk of profit shifting through the development of two inter-related rules:
an income-inclusion rule; and
a tax on base-eroding payments.
The proposal recognises that countries or jurisdictions remain free to set their own tax rates, or not to have a corporate income tax system at all. It nevertheless considers that in the absence of multilateral action there is a risk of uncoordinated, unilateral action, both to attract more tax base and to protect the existing tax base, with adverse consequences for all.
The inclusive framework intends to agree a detailed programme of work at its May meeting, with a view to reporting progress to the G20 Finance Ministers in June 2019 and delivering the solution in 2020.
‘The international community has taken a significant step forward toward resolving the tax challenges arising from digitalisation’, said OECD tax policy director, Pascal Saint-Amans. ‘Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important.’
The inclusive framework will hold a public consultation in Paris on 13 and 14 March, to be followed up with a detailed consultation document in due course.
